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The Second Law of Thermodynamics: What it Means to Risk Management

Adoctor was asked how order is maintained in the chaotic environment of an emergency room. He responded that the main purpose of an ER is to treat traumatic medical events and bring calm to the injured as well as to the individuals and families involved. Managing these processes engages the Law of Entropy.

The Law of Entropy is expressed in the second law of thermodynamics. The law predicates that the natural state of all things—from the tiniest atoms to the largest of galaxies—is that of disorder. In layman’s terms, without appropriate systems or balances in place, everything wants to fall into chaos.

This is true of any process and risk management is an excellent example. To effectively manage risk, one needs to:

  1.     evaluate what can go wrong (what are the risks?);
  2.     develop strategies to reduce the frequency and severity of those risks;

  3.     determine what part of the risk to transfer (often to an insurer); and

  4.     monitor the risk and make adjustments.

In order to do this correctly, individual procedures and policies must be developed. But how many times has an issue been addressed within a company, communicated to staff, then assumed it was being done correctly, only to find out later that it wasn’t?

A good example is project intake. For example, an engineering firm has an excellent project intake process in which it asks questions about the client, the financing, project type, budget, schedule, etc. Project managers review the forms and if there are enough negative check marks, it is sent to senior management. Work has been tough to get in the last five years, firms have been scrambling, and when this happens, discipline tends to deteriorate.

When a lawsuit came in, the managing principal immediately wanted to see the project intake checklist. This was regarding a mixed-use retail/residential project (one the firm didn’t have much experience with) being developed by a company that had a history of suing its design professionals. The project was thinly capitalized and the schedule was unrealistic. How did this get through the client intake filter? What went wrong?

Was it staff’s lack of discipline or the manager’s inability to manage? If staff and management were taught how the project intake process works, why didn’t it work? To find the answer, look back to determine if the right systems were in place to monitor the processes that were set up to begin with.

The old adage, “that which gets measured, gets done” holds true. A company can’t simply develop systems and processes and forget about them. It has to build procedures to measure and monitor those systems and processes. If there is no monitoring system in place, it is difficult to see the problem until it’s too late. All of the time and energy that the organization spent to develop the original systems will have been for naught.

Just as an emergency room must have systems in place to ensure certain traumatic injuries are handled correctly, a risk management program must have monitoring processes to prevent it from falling into its natural state: chaos.

In short, what systems does the company have in place that will prevent the Law of Entropy from taking its toll on risk management efforts?

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